#1: Know Who Regulates Your Prospective Broker
Trust me – you want someone looking over your broker’s shoulder. It’s in your best interest that someone is watching your broker. That means that your forex broker must be regulated by one or more entities that ensure strict regulation.
The good news is it’s easy to know if your broker is regulated or not. Just check their location.
If your broker is regulated by authorities in the United States, United Kingdom, Canada, Hong Kong, Japan, Switzerland or Australia, then you can be reasonably certain your broker is properly regulated. And if your broker just does business in any of these places, he should be properly regulated.
However, if your broker is in Cypress, Belize or places like this, then you need to check and double check to make sure your funds are safe.
So I suggest choosing a highly-regulated broker based out of one of the well-regulated countries above.
After all, would you want to live in a city with no police? How about a very small, lax police force in a huge city? Personally, I wouldn’t want either one of those. But that’s what you have if you choose an FX dealer in the wrong country.
#2: Make Sure Your Broker Has the Funds to Back You
Next step: Make sure your FX dealer has the funds to stay in business over the long haul.
But this is much easier than it sounds. If you chose a broker from a highly regulated country, then it’s very likely that this broker already meets the minimum capital requirements to do business.
The only consideration that remains is whether your potential Forex broker has deep enough pockets to cover millions of dollars in trading, or is it a relatively new firm that barely meets the minimum capital requirements?
For instance, here in the U.S. back in 2009, the National Futures Association (NFA) ramped up the net capital requirements for U.S. forex firms. To stay in business, all FX firms now must have at least $20 million in assets.
That killed a lot of the small fish here in the United States. So be sure to ask how much your firm holds in excess cash reserves.
Also keep in mind there are some monster whales in the United States that have $125 million or more in cash. With these huge FX dealer firms available, I suggest you go with one of the largest, well-capitalized firms.
#3: Use a Firm that Does Business the “Right Way”
The final question you should ask is: “How does your prospective broker do business?”
Do they care about their clients?
In the forex-trading world, that usually comes down to another question: Is your prospective broker a “dealing desk broker” or a “no-dealing desk broker?”
Dealing desk brokers take the other side of your trade. In other words, if you buy the EUR/USD, they will sell the EUR/USD. So your loss is their gain.
On the other hand, your gain is their loss. See the potential for conflicts of interest?
No-dealing desk brokers do not take the other side of your trade. They typically have a “pass through” model of doing business. That means they take your order and pass it through to one of the major interbanks.
They get paid a small fee regardless, so they don’t care if you win or lose on your trade. Your loss is not their gain.
However, ideally they’d want you to win, because winners continue trading longer. These brokers earn their living when you trade, so they want you to trade for a long time. I prefer this type of “no-dealing” broker for that very reason.
So when you are looking into a broker … don’t just look at how pretty their Website is or how many bells and whistles they have.
Determine whether or not they are regulated, where they are regulated, and to what degree. Find out how much excess capital they have after meeting their regulator’s minimum requirements. Then make sure they have a “no-dealing desk” business model.
For more on this subject go to http://www.thetradingreport.com/2011/07/29/retail-currency-investing-the-three-secrets-to-success/
Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.